Razor’s Edge
Maximizing the Profit Margin of Your Self-Published Book
It’s hard out there for a . . . purveyor of material that transports the user to another, more pleasurable, state of existence. Not a pimp, an author. It’s hard out there for an author. For all kinds of authors, frankly. But today I am talking about the self-published authors, who have their own distinct challenges to deal with.
We all want to make money. It’s a very human desire to see the things you worked hard on pay off for you. Not everybody writes for the joy of writing, or not only for the joy of writing. Some people write to make money, either as their sole reason for writing or as one of their reasons for writing. This is a totally good and appropriate reason to write.
Today’s Shelf Life is on the mathematics of making your self-published book pay you.
When it comes to making money off your book, there are factors within your control and there are factors outside your control. Inside your control are costs and price. Outside your control is the number of units sold. You cannot control how many copies you sell. If a company tells you they can guarantee a certain amount of book sales—for instance if you contract with them to do your book’s marketing?—they’re very likely scamming you. Trad publishers can’t guarantee book sales either. Nobody can guarantee units sold unless they’re actually offering to purchase those units themself.
You can control what it costs to make your book and the price at which you sell your book. This means what you can control is your contribution margin.
Contribution margin is a percent calculated by taking your revenue (the money you will make from the sale of your book), subtracting the variable costs (the money you spent to create your book), and then dividing by the revenue. To improve your contribution margin, you can raise the price of your book or decrease the cost of making your book.
Here’s an example. Let’s say you’re going self-publish your book on Amazon through the KDP program. If you spent zero money on editing, cover design, proofreading, layout, et cetera, then you might be thinking the cost to make the book was zero. However, if the list price of your book is $3.99 per copy, you do not earn $3.99 per copy. Amazon earns $3.99 per copy, of which they pay the author (you) a royalty of either 70% or 35% depending on the terms you choose, but let’s go with 70%.
Amazon pays you a 70% royalty on the sale of the book, but in reality it’s just as correct to say that you pay Amazon 30% of the book’s list price to manage the sale for you. This is equivalent to a wholesaler’s discount if you were selling books via a distributor.
So looking at it this way—let’s theorize that you sell one copy at $3.99. Your revenue is $3.99. That’s the money you made on the book. Your variable cost—the cost of selling the book—was $1.19. That’s the amount out of your $3.99 revenue that you paid to Amazon. To calculate your contribution margin, then, you would take:
($3.99 – $1.19) / $3.99 = 70%
Your contribution margin on this book was 70%. That’s obvious—because you paid 30% to Amazon and you kept 70% at the end of the day. Whether you sell 1 unit or 1 million units, if those terms stay the same then your contribution margin will remain the same at 70%.
You’re no dummy. I said you could control the contribution margin by controlling your price, but no matter what you do with your price, this contribution margin stays the same—because Amazon’s take stays at 30% of whatever your list price is. True.
However, you’re unlikely to have only a fee to pay to Amazon calculating into your contribution margin. This is the simplest possible calculation in which you have no costs at all except for the cost of doing business through Amazon. But what if you spent $500 on cover design?
($3.99 - ($1.19 + $500.00)) / $3.99 = yikes
That is not a good margin—because you’re paying the entire cost of your cover design out of the sale of one book. What happens if you sell 500 books?
($3.99 - ($1.19 + $1.00)) / $3.99 = 45%
In this scenario, each unit sold (500 units) paid $1 toward the cost of cover design and $1.19 toward cost of doing business with Amazon. The more units you sell, the more units over which you can amortize the cost of creating the book. In this scenario, raising the list price also affects the margin. Let’s assume a list price of $5.99 and 500 copies sold.
($5.99 - ($1.79 + $1.00)) / $5.99 = 53%
The margin improves when the list price is increased if the costs remain the same. Likewise, consider a list price of $3.99, and 500 units sold, but you only spent $250 on the cover design:
($3.99 - ($1.19 + $.50)) / $3.99 = 57%
This tells us the margin would be improved more by cutting the cost of cover design in half than by raising the list price by $2.00.
You can use my handy and free Self Publishing P&L Sample to total up your costs. (For more information on the costs associated with self-publishing, check out Budgeting Your Self-Publishing Project, Part I and Part II.)
Go ahead and open the sample profit-and-loss statement now and try it out. (Make a copy to edit the file.) Put in any money you’ve spent, or expect to spend, on your book, and enter the list price. Start with unit sales of 1 unit. I’ve followed our thought experiment so far—$250 for cover design, 30% to my retailer (Amazon), and a list price of $3.99. The outlook is grim—because the entire cost of the cover design couldn’t be absorbed by the sale of one unit, so in this scenario the author loses big.
Personally, I hope your book will make it big whether you choose to self-publish or publish traditionally. I hope you’ll be a breakout bestseller. But as you’re getting your start, if self-publishing is the path for you—or if you’re trying to figure out whether self-publishing is the path for you!—I trust you’ll find this explanation of publishing profit margins helpful and hopeful.
A healthy contribution margin would be somewhere around 70%. Take some time with the calculator to figure out how you’d have to price your book, how many units you’d have to sell, or how you’d have to cut your costs to come up with a healthy margin.
Spoiler alert: Without changing anything else, I see that I reach a healthy margin of 70% if I sell 300 units.
Now: I already stated—unequivocally—you can’t control how many books you sell. This remains true. However, you can predict—you can make an educated guess. Every author has to start with some kind of projection. I know if I put a book up for sale tomorrow, I could sell 10 copies. My family and friends would be good for 10 copies. Could I take 100 copies to the bank? Three hundred copies? No.
However, if I knew I had to sell 300 units to make my book turn a comfortable profit, then I can work toward selling 300 copies over whatever amount of time I consider the book’s “selling lifetime.” Could be six months, could be 10 years, whatever.
The key is that profitability isn’t in how much money you make from the sales of your books, but a function of what proportion of that money was taken up by the cost of creating the book.
You can’t control the number of units you sell, but you can make a projection and a goal. Once you have that goal, you can develop a budget for your book and set your list price accordingly. It isn’t a bad idea to consider what your margin would look like at various lifetime total sales. Let’s say your goal is 300 lifetime sales to make the profit you want. What does your margin look like if you make 150 lifetime sales instead? At what number of unit sales will your book break out of the red and into the black, having paid back all its costs?
Today’s Shelf Life got it’s title from the razor-thin profit margins in the publishing industry. Many books don’t break even and pay for themselves. This is true in self-publishing and just as true in trad publishing, where bestsellers that bring in tons of revenue subsidize the cost of the books that don’t succeed.
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